My latest article, on Spanish startups, in Fair Observer

The Spanish Struggle to Duplicate Silicon Valley

http://www.fairobserver.com/article/spanish-struggle-duplicate-silicon-valley

Blueprint for Banking Union

Note: this essay draws heavily on “What kind of European banking union?” by Jean Pisani-Ferry, André Sapir, Nicolas Véron, and Guntram B. Wolff. However, the synthesis is my own and does not necessary reflect those authors’ research.

The rationale for a European banking union complementing monetary union is straightforward. To start, there is an inherent contradiction between pan-European banking and exclusive national responsibility for bank crisis resolution. Developments during the recent crisis have exposed further weaknesses: capital is seeking safety rather than moving freely; asset ring-fencing and risk-shifting may actually increase the overall public cost; and finally, the ECB simply cannot address solvency concerns while staying committed to its primary target of combatting inflation. A banking union can address these problems while not veering into the more dangerous fiscal union territory, as Stephen Castle argued in the New York Times.

Consensus on some elements

What would a banking union entail? First, a European banking charter to create a single rulebook for all bank entities. Second, a supervisory body that, unlike today’s EBA, has direct authority over banks. And lastly, European deposit insurance funded by contributions from participating banks. These elements are present in Brussels’ latest plan for a banking union that will take effect in 2013. 

While it is imperative that the banking union include the Eurozone countries, incorporating the entire EU-27 would harmonize the functioning of financial markets with the free movement of goods, capital, services, and people. However, an EU-27 banking union is probably too ambitious given the objections of the UK and other countries.

Decisions to be made

Many aspects of the banking union have yet to be determined. Chief among them are which banks will be involved, who will act as the supervisor and how to structure the deposit insurance. Pisany-Ferry and his co-authors offer the following thoughts on these issues:

Which banks: The union should cover the entire banking sector – if political consensus can be achieved for it – rather than only those banks considered systematically important at a European scale. This would avoid distortions between smaller and larger banks, while also removing the possibility of skirting rules through subsidiaries.

Which supervisor: The ECB is better suited than the EBA to act as the banking union supervisor, due to its greater resources and higher credibility. However, this could place new political pressure on the ECB, interfering with fiscal policy. Therefore, it will likely be necessary to create a new supervisory institution.

What deposit insurance: Deposit insurance will most likely occur through a re-insurance of the existing national deposit insurance schemes, potentially with additional contributions from member states’ governments. To create a fiscal “backstop” for the re-insurance, it is necessary to give the managing entity the ability to draw on additional resources in case of crisis – either through contingent taxation or borrowing. Again, these merely create an “intervention chest” for crisis resolution.

An uphill but important battle

Implementation of a banking union is far from simple. It requires, at the least, increased empowerment of the European Parliament, and at the most, the creation of a new European Ministry of Finance. Authorities must be vigilant so that banks do not hide their losses in the hope that they will eventually be mutualized.

Nonetheless, the failure to move forward on this issue could greatly endanger the viability of the monetary union. The proposed banking union would not only help address the negative feedback loop between sovereigns and banks; it would also demonstrate that the euro area has the political will to draw lessons from the crisis.

Don't Fly Ryanair. Just Don't.

A 12 Euro flight from Barcelona (Girona) to Milan (Bergamo) on a Friday night seemed too good to be true. When it landed 2 hours late in the wrong city, I knew it was. Welcome to Ryanair.

What happened? I arrived on time for my flight on a Friday night from Barcelona (Girona) to Milan (Bergamo), scheduled to depart at 22:35h and land at 23:55h. I had paid 12 Euros for the flight - 0 Euros base fare plus the mandatory taxes and fees.

Boarding was delayed by about an hour in Girona. Once we had boarded, however, the plane did not move. The crew gave us vague updates: mechanical problems, technicians arriving, more senior technicians arriving, calculations being performed in offices. To no avail. An hour later we had to de-board with our carry-on luggage and get on another plane. This one finally took off - 2 hours late.

But that wasn't the end. We were almost at our destination when Ryanair made the announcement that the Bergamo airport was closed. We instead landed at about 2am in Verona, about an hour and a half away by ground.

Upon arrival, passengers were promised a bus back to Bergamo Airport, 100km away. This did not seem particularly appetizing. What ground transportation could we hope to find now that the airport was closed? Would Ryanair still offer the connecting bus to Milan? Nonetheless we waited outside the airport. 45 minutes went by and the bus showed no sign of materializing. We saw the pilot and crew sneak off in a van (so much for the notion of the captain going down with the ship). There was no airport staff anywhere.

At this point my girlfriend and I made a desperation move. We hailed the only cab at the airport and asked him to take us to the Verona Airport Hotel, visible in the distance. We arrived quickly at the hotel and went to sleep. Hotel and cab fare cost 125 Euros.

Parts of the story made sense. Maintenance problems were discovered just prior to takeoff, forcing passengers, crew, and luggage to change planes. Pushing the late scheduled takeoff to 2 hours later caused issues at the destination airport, which diverted the flight to a nearby airport.

But other parts defied logic. What kind of aircraft service operation requires the technician to scurry back and forth to his office inside the terminal to perform some calculations? Why was our flight prevented from changing planes to allow four successive incoming flights to land, when the only chance we had to arrive at our destination airport was to switch immediately? How could the flight crew wait until 20 minutes to landing to notify us that we would be landing not at Bergamo but at Verona? Why did the airline neglect to offer better bus options and why was there no one on hand to answer our questions?

Was it an unfortunate series of bad breaks or deliberate mismanagement and utter disregard for the customer? For me, there is too much evidence in favor of the latter. I understand that maintenance delays are part of air travel but the airline had so many contact points at which to improve both its operations and its service to avoid stranding us unaccompanied at the wrong airport in the middle of the night.

Luckily, passengers have rights. According to European Law (EU Regulation 261 / 2004), airlines are required to reimburse passengers for expenses incurred due to a delay longer than 2 hours. Ryanair's website states that they only reimburse for cancelled flights, in blatant disagreement with the law, but I decided to submit a claim anyway. My first attempt failed; their online claims submission form doesn't work. Eventually I sent a letter through fax. In it, I argued that according to European Law a delay longer than 2 hours amounted to a cancellation and rendered Ryanair liable for the incremental expenses I had incurred.

The response came through a week later (to my email address, oddly), ignoring the distinction between a delay and a cancellation but asserting innocence because factors outside the airline's control had caused the flight to be diverted from Bergamo to Verona.

I interpreted Ryanair's response as denying my first claim automatically with a flimsy justification and hoping I would go away. I had to again reply by fax since Ryanair does not accept customer communications via email even though they had emailed me their response. This time I told Ryanair that ignoring the 2-hour mechanical delay which actually caused the diversion was an unacceptable oversight. It's not as if the flight took off on time and had to change course due to bad weather. The law clearly states that mechanical failure is the airline's responsibility. I asserted my right to elevate my claim to the Italian air travel authority, which could subject Ryanair to a € 5,000 fine.

The next response arrived a few days later. While again denying blame, the airline had decided to pay my claim in full via a check. I had demonstrated that I knew my rights and Ryanair was keen to avoid the investigation and potential fine at the hands of the Italian air travel authority. Victory for the consumer! The check eventually did arrive, though after three weeks instead of the two the airline promised.

Meanwhile, I decided to see if I could verify Ryanair's ever-present claim that it is the "No.1 on-time airline in Europe with the least flight disruptions; as detailed in audited statistics issued by the UK Civil Aviation Authority." I ran some numbers on the 2011 data, analyzing 1.4mn flights, the output of which is below. Ryanair's performance is not bad according to this data. Nonetheless, I believe the claim is wrong for 3 reasons:

1. Ryanair is NOT the most on-time airline in Europe, according to this data. Other airlines that have less flights are more on-time. Ryanair could choose to claim (correctly) that it is the most on-time budget airline, or is better than British Airways, or that it exceeds the UK average of 80% (Interestingly, the US average is 85%, according to a recent FT piece) - instead, they opt for a boast which sounds better but is false.
 

2. It is unclear whether the data is actually audited by anyone, as the CAA says they compile it from various sources (i.e., the airlines themselves) and can neither certify the data's "accuracy, integrity, or reliability" nor comment on any conclusions drawn from it.

3. The UK CAA, as its name implies, publishes data on arrivals to UK airports. Yet Ryanair operates throughout Europe. The agency responsible for compiling Europe-wide delays is Euro Control, which says it cannot disclose data on individual airlines. 

Why would Ryanair consistently make this claim (it is ever present in communication with customers as well as public filings)? First, to counteract well-publicized horror stories and customer campaigns. Or perhaps the airline cites UK CAA data because Euro Control's data is less flattering. Either way, when your flight has been delayed or cancelled the claim is of little consolation.

I won my battle against Ryanair by getting a refund for the expenses I had incurred due to their mismanagement of my flight. I wonder how many consumers in the same situation have had the patience and tenacity to do the same.

Airline	# Flights	On-Time	Late
BRITISH AIRWAYS PLC	277,063	80%	20%
EASYJET AIRLINE COMPANY LTD	200,146	82%	18%
RYANAIR	127,843	85%	15%
FLYBE LTD	110,573	85%	15%
BMI BRITISH MIDLAND	48,558	78%	22%
THOMSON AIRWAYS LTD	40,711	77%	23%
LUFTHANSA	33,679	71%	29%
MONARCH AIRLINES	29,765	70%	30%
AER LINGUS	28,394	83%	17%
THOMAS COOK AIRLINES LTD	27,906	75%	25%
BA CITYFLYER LTD	25,416	86%	14%
VIRGIN ATLANTIC AIRWAYS LTD	19,771	76%	24%
SWISS AIRLINES	18,278	81%	19%
SAS	17,959	84%	16%
KLM	16,428	87%	13%
AER ARANN	16,210	84%	16%
VLM (BELGIUM)	15,935	90%	10%
WIZZ AIR	15,686	72%	28%
LOGANAIR	15,494	88%	12%
CITY JET	14,757	88%	12%
JET2.COM LTD	14,417	61%	39%
BMI REGIONAL	13,859	92%	8%

* On-time flight: Within 15 minutes of stated arrival.

Ageing and the Financial Crisis

I published this article last week in Fair Observer, working with the noted economist and ageing expert Edward Hugh. Enjoy!

http://www.fairobserver.com/article/ageing-and-financial-crisis-more-meets-eye

Groupon On the Up in Spain

Nursing a beer yesterday at my neighborhood bar while the wait staff prepared for the dinner crowd, I casually eavesdropped to their typical machismo chit-chat about football and motorcycles. Then, my ears perked up at the mention of Groupon.

In the US, Groupon's growth has slowed. Vendors find it difficult to deal with the influx of new clients, and at the same time realize many are unlikely to develop into repeat patrons, which unfortunately influences how they treat Groupon holders. Customers, meanwhile, are frustrated by (among othe things) stringent, often confusing conditions that prevent them from using their Groupons.

But my neighborhood bar was still in the honeymoon phase with Groupon. In one day of Groupon sales in February for a 20€ / pax tapas or seafood menu, they had sold 2,000 Groupons. A month later, only 400 holders had redeemed their Groupon but the increase in traffic was still noticeable. Last night, a Thursday, the restaurant was booked. Same for the next night, and in fact for ever Thursday-Sunday in March. "We're taking bookings through May!" the Maitre-D exclaimed to one of the waiters. I listened in mild shock as he told a customer over the phone, "Nothing for next weekend, no. Yes, maybe there will be a cancellation. Call me Tuesday, 6-8. That's when I can take calls."

I have eaten at this restaurant and I can assure you it's nothing special. If the tapas or seafood prix-fix is anything like a recent meal I had there, diners will be disappointed. But Groupon's 1 million customers in Spain are, for the moment, all too eager to find out for themselves.

Follow me at the Esade MBA's blog

To my 3 loyal readers, just letting you know that I am now posting on the official blog for the Esade MBA. You'll find recent posts about a trip to the Global Sports Forum in Barcelona, the latest Javier Solana lecture, and this year's annual Esade alumni reunion.

http://mba.esadeblogs.com/

Spanair - La Deuda de Todos

The Spanair debacle shows that perhaps Catalans' trust in their government is misplaced. The airline ate public money every year since its 2009 purchase and finally went bankrupt last month. Ferran Soriano, the former management consultant installed at the helm, comissioned turnaround studies by management consulting firms BCG and Europraxis which, as consulting studies do, predicted that profits would skyrocket. Meanwhile, the airline was no more operationally sophisticated than any of its peers and did not have a real value proposition besides having a hub in Barcelona.

Whether Spanair did not possess the expertise to implement the consulting advice or whether the profit forecasts were just pie-in-the-sky inventions is impossible to determine. But the government and Soriano were clearly out of their element. You should never buy an airline that costs 1 euro, precisely BECAUSE it costs 1 euro!!!

Even if the operation was somewhat political, as a new regime entered office and cut the faucet, Spanair was clearly not viable, ceasing operations with €350mn in debt and only €100mn in assets (they did not even own their fleet). In my mind, Catalunya owes its citizens an explanation.

For the full story, check out my article on Fair Observer:
http://www.fairobserver.com/article/la-deuda-de-todos-fate-spanair